Good day and thank you for standing by. Welcome to the Hillman 2021 Third Quarter Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Jennifer Hills, Vice President of Investor Relations. Please go ahead.

Thank you. Abigail. Good morning. This is Jennifer Hills, Vice President of Investor Relations at Hillman. Thank you for joining us this morning to review and discuss Hillman's Third Quarter 2021 Earnings Results. Joining me today are Doug Cahill, Chairman, President and Chief Executive Officer and Rocky Kraft, Chief Financial Officer. A copy of our earnings release and slide presentation can be found under the Investor Relations section of our website at www.ir.HillmanGroup.com. Before we begin, we would like to caution you that certain statements made today may include forward-looking statements that are subject to the Safe Harbor provisions of the securities laws. These forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties, assumptions and other factors, many of which are beyond the company's control and which could cause actual results to differ materially from those projected in such statements. Some of those factors that could influence the company's results are contained in our periodic and annual reports filed with the Securities and Exchange Commission. Please see slide 2 in our earnings call deck for more information regarding these risks and uncertainties. We will begin the call with a business update from Doug followed by Rocky who will be providing a financial review of the quarter. Now let me turn the call over to Doug.

Thanks, Jennifer. Let me start by breaking down our business by segment and review performance during the third quarter and year-to-date. To capture the chase our hardware solutions, robotics and digital solutions and Canadian businesses all performed well in the quarter in spite of the historic supply chain challenges and a very strong third quarter last year. But the unwinding of our COVID related products and protective solutions negatively impacted our earnings. Going deeper our HS business, net sales were down 6% during the third quarter versus 2020 and were up 2.6% year to date. The third quarter was a bit slower for HS business than we anticipated for two reasons. First, America said we're getting out of the house in July and August, and they did. And second, higher lumber prices slowed projects down during the quarter, but since mid-September lumber is more affordable, kids are back to school, retailer's point of sale volume has rebounded at the shelf and people are back to their home projects. You will remember the very strong third quarter HS experienced last year, up 22.7% at the height of the stay home and DIY projects time frame. If you look at HS over a longer time frame you will see a healthy, growing business. On a 2-year stack. It's up 59% in the third quarter versus 2019 and year-to-date; it's up 19.8% versus 2019. I'll talk much more about HS and hope you'll agree that this business is executing and well positioned. Our RDS business, net sales were up 14% in the third quarter versus 2020 and year-to-date, they're up 20.3%. So continued great performance by the RDS team. Canada's third quarter was very similar to HS comping a strong Q3 last year and net sales were up 15.6% year-to-date and a very…

Thanks, Doug. On a GAAP basis, our net sales for the third quarter of 2021 were $364.5 million, a decrease of $34.2 million or 8.6% versus the prior year. As we discussed on prior calls, the third quarter of 2021 was our toughest comparison with the prior year as our retailers bought any and all COVID-related Personal Protection products we could ship them in 3Q 2020, and our hardware businesses in the US and Canada experienced significant growth as consumers repurposed their homes for COVID quarantine. The much faster than expected reduction in sales of COVID-related items drove an approximately $26 million reduction in our PS business, a decrease of 26.6% and an even bigger reduction to profitability because of the profit on PPE products in the prior year. In addition to having an extremely difficult comp and hardware solutions the reduction in foot traffic in our retailers in July and August led to a year-over-year sales decline of $12.9 million or 6.4%. The first round of price and a rebound in foot traffic in demand in September were not enough to offset the headwinds early in the quarter. Similar to US hardware, our Canadian business was up against extremely difficult comps and declined by $3.7 million or 9.3%. Our RDS business was the star of the quarter as we continue to see a rebound in this business post COVID. RDS revenue was up $8.3 million or 14%. Year-to-date revenues have grown 3.9% to nearly $1.1 billion with hardware sales up 2.6%, RDS up 20.3% and Canada, up 15.6%, partially offset by the 8.9% decline in PS. With easier comparisons in the fourth quarter and an improvement in traffic at retail hardware solutions should finish the year strong and we should achieve our long-term mid single-digit revenue growth target for…

Thanks Rocky, let me just wrap up. While near term we're definitely filling the sales and profit impact of the sudden fall off in demand for COVID related PPE together with the historical supply chain cost pressures. Our confidence in the long term is strong; we have a really good company. Thanks to our 3800 associates. In our category you don't win or lose business just on price. Fill rates are critically important to all retailers, especially now that is the quickest way for a retailer to lose market share. Our 1100 folks in the field, combined with our direct-to-store delivery model and our investment and additional inventory enables us to keep the industry leading fill rates above 90. This puts us in a great position to gain additional shelf space with our retailers and achieve our long-term targets of 6% organic revenue growth and 10% EBITDA. A lot going on with that let's turn to the operator and open it up for questions.

[Operator Instructions] And our first question comes from the line of Reuben Garner with Benchmark Company.

Thank you. Good morning, everybody. First off, Doug, congrats on your Vanderbilt Party Win in the World Series last night. Jumping into it here, so I just want to get clarity on the 2022 and apologies, I got kicked off the call a couple of technical difficulties. So if you spoke to this, I'm sorry, but, so you pulled the outlook, I think I heard Rocky say 10% growth off the lower base, that's your standard algorithm. Is there any reason why we wouldn't one of the issues this year are sort of one-time are seem to be one-time you've got new pricing actions in place. Is there any reason why you kind of wouldn't grow substantially faster than your typical 10% next year, or is it is the reason you pulled it just because it's too early? What are the factors that you're looking at that led you to make those comments for next year?

Yes. So Reuben, this Rocky. I mean, as we think about next year as we sit today obviously there's a lot of craziness going on in the ports. I mean, November 15 there is even expectations at the costs around things like demurrage and detention going up, hiring going up potentially exponentially. And so, we're committed to that 10% growth algorithm and feel really good about doing that next year, but at this point in time we just don't believe it's prudent to go out with a number higher than that, especially when you think about a business like hardware that is a normal steady growth type business on an annual basis. So we feel good about the 10%. Our going-forward plan will be in our year-end call, we'll give more specific guidance with a range, but just at this point in time, saying anything other than we're going to grow at our standard algorithm we think wouldn't be prudent.

Yes, Reuben the only other thing I'd add is, September, October, November and December we will see these demurrage and detention charges for, again in many cases, we're trying to get in and can't, and while those aren't going to be with us forever. We're just not sure when they go away and we just need to let some rope out here and just see because again this November 15 extra $100 going up 100 every day. Nobody's ever heard anything like that. So that's why we're trying to do the right thing as we sit today on where we are.

Understood. And just a quick follow-up on the new pricing actions that you have and I think you're moving into kind of a 90-day model checking the costs. I mean that would incorporate some of those pressures right? But you're, still you're still having to --I mean is that a negotiation or when you're seeing this ocean freight rates go up? Are those sort of are they in that basket of goods that you're telling your customers that you've got to pay for. So they need to pay for it.

Yes. So it's all part of it. And if you think about it, let's just assume Reuben that we get that third price increase when I think and let's say it's effective February 1, 2022. That's essentially three price increases over 20% in 290 days. So that's about 97 days per and the way that breaks down is it's about, we need about 25 or so days to get all the math because we have to go by product by SKU, by steel, by freight, by demurrage, all of that and it's not hard to do, but it takes a while for about for us to put it together. So it's about averaging just around 95 days right now for the three, that the third one coming.

Got it. And then on the Protective Solutions impact this year, and again if you said this, I apologize, but can you just talk to us about what the one-time hit was this year from the actions you've had to take, altogether the math, gloves everything? What's the drag that had on the business this year that we won't see going forward?

Yes. So as you think about the business Reuben obviously we had the charge in the period, but even when you look at the actual results, our PS business in the third quarter HMH was down even year-to-date down from an EBITDA perspective, it was about cut in half. And so we're going to baseline off that. We do believe the core business is solid. If you look over the last three years the organic growth in the core is about 7% and so again we'll baseline off kind of that new EBITDA number and then we expect that business to grow with our algorithm so mid single digits top line and kind of call it 10% bottom line into 2002 and into the future.

Our next question comes from the line of Hamzah Mazari with Jefferies.

Hey, good morning. It's actually, Ryan Gunning filling in for Hamzah. On my first question can you guys just talk about how we should think about the penetration opportunity in robotics, maybe where you're at today and what the addressable market looks like, and as part of that with the competitive dynamics look like?

Sure. Yes, Ryan, I think if you break it down first of all Minute Key continues to roll out, but we probably have another thousand machines, Rocky would be my guess.

Yes.

On minute keys that we're going to roll through of visibility that we kind of see. Maybe a few more, and Ryan and the reason I say that is this whole labor thing is making Minute Key even more popular and in more demand because of the store labor. So let's just say a thousand unless the labor thing continues to get worse, that's first. On knife sharpening we will end up at about 500 at the end of the year, we have orders for 3,000. That's first customer. We haven't gone day by us, but obviously the chip shortages is limiting that we did get 500 more chips last night. So I was happy about that. I don't know we bought them on eBay or what, but we got them and so we'll be rolling those out and I assume that chip shortage will work its way through. On Instafob we're rolling those machines out. On the smart auto fob or auto our key, we've had great luck their in-store. We've just started our second account there and our shipping the fobs and then we're working on the future where you can buy that fob of yours that you're used to pay in 354 at Minute Key kiosks and then our locksmith community will program it for you at your home or office or wherever you like. So, I think there are a lot of good things that can happen there. On Pet we're seeing great progress there on the padding graving. We've got a new machine that is looking to do more than padding graving like luggage tags and in pharmacy. And then I just think there's a huge opportunity for us with the consumers we have and the great customers we have like Walmart and PetSmart, and Pepco's, Pet Supplies Plus to take this air tag from Apple embedded into our Pet Tag engrave the number and name and literally like you can find your phone, I think in the fairly near future you'll be able to find your pet just like that. So lots of things going on from a competitive set, we're not seeing a whole lot. We do 132 million keys a year, we duplicated and our closest competitor is under 10 million and on pet tags, we're going to do about 11.1 million this year and our close competitor going to do about 1.3 million. So not a whole lot there, but a lot going on with our customers and our team is doing a great job.

Great, that's super helpful. And then for my follow-up, I know you talked about labor in your prepared remarks but could you maybe walk us through how to think about SG&A leverage going forward and just hiring plans given where labor issues are.

Yes. So as you think about, we're spending a lot of time around how we make sure that we keep the 1100 folks motivated in the field. We'll think about how we compensate them and do some creative things so when they perform well they do better over time. The interesting thing is we're not going to take out folks in the stores and a matter of fact just given the competitive advantage we would see if anything we would increase the number of associates we have in the stores and we've got our retailers asking for that. And so as we thought about the quarter one of the areas that we don't deleverage well is there and we're not ever going to because we're going to make sure we take care of our customers. The other big item in the quarter really was around RDS as we see that out sized growth in RDS and we pay a rev share anywhere between 25% and 30% to the retailers on our kiosks, obviously you get some out sized growth in SG&A when the RDS business grows. Well, but overall in the EBITDA line we love the leverage is it's north of 30% from an EBITDA rate. So again, over time I think you are going to see inflation in the wages that we're paying to our employees, not only in the field, but also in our DCs, but that's part of our price algorithm that will include as we start to think about price over time.

Our next question comes from the line of David Manthey with Baird.

Thank you and good morning. Yes, good morning. First off, on the 7% to 8% price increase in the fourth quarter. When did you say that went into effect specifically?

So that second 7% to 8% Dave is effective last month and this month that will be all implemented by the end of November. So really the past two months, this month and last.

Okay. And when you're referring to that 7% to 8% type number, is that just on the hardware solutions, is that across the board of the company and I'm trying to understand what that number means relative to the numbers you report.

Yes. When I talk about the 7-- let's call it 7.5% plus 7.5% and then eventually getting over 20% by February, Dave, that's in the tank the hardware business. We're also raising price on things like keys, we're raising price on things like everyday work gloves, but not as significant. And if you really just think about the math when you've got a 3-inch bolt just not a whole lot of other cost of steel and freight. So that one is what I was referring to when I said 7.5%, 7.5% and eventually getting over 20%. Other businesses are rising but not at that level.

Okay. And then as it relates to the price increases I know some of this is real time, but the ones that you have implemented and are implementing this year, is that to catch up to where inventories are now? And then the one you're expecting in February of next year is that trying to get ahead of inflationary pressures that you see in your supply chain pipeline? I'm trying to understand your current level of inventory versus these price increases and essentially does the fourth quarter look incrementally better because you sort of have a glide path from your prior price increases plus a new one, which is catching up to the current level of inventory, which itself is moving higher, can you just help me balance those issues in the supply chain if you would?

Yes, let me take the first part David because it's a good question, it's complicated, but let me just show. Here's how we do it with retailers. We sit down and justify what we call entitlement. I don't like the word, but that's the word they use on everything that's happening or that has happened to justify the increase. And again, we've been really happy with what we've been able to do. So what's happened, not what we think is going to happen and this last one is, we know there is a lot more happening in the second half of the year with these additional surcharges on the front end and then you only get 10 days to bring the container back or you're detention starts clicking there. So that's a new element that's part of this model and Rocky, maybe you can talk about the way the inventory flows because I wish we were ahead of it, but we're not.

Yes, so. Importantly, given the nature of our business, we carry about 6 months of inventory and we've talked about the lead times going up, which means we're carrying a little more inventory today than we did a year ago to deal with the bill rates. And so, as I kind of said in my prepared remarks, Dave a lot of that inflation is still hung up in inventory and will come through in 2022. We start beginning to see some of the, I'll call it higher cost containers in inventory begin to hit in the fourth quarter and that is some pressure on the fourth quarter. We do believe once we get that third price increase in place, we will have kind of got the price cost differential fixed and will be whole on a dollar for dollar basis. But again, that as Doug just said, we're talking to our retailers today about the cost justification. So it's as of today, if cost continues to go up then be chasing it a bit.

Our next question comes from the line of Ryan Merkel with William Blair.

Hey guys, good morning. So yes, Doug lot going on here. I was hoping we could focus on the change in guidance. So you were at 240 for EBITDA, now were lower by $30-$35 million. Can you break out the impact of slower hardware, PPE fall off, and supply chain just so we can bucket it.

Yes. Here's how I would I would characterize it at a high level, Ryan. As you think about what we said in the second quarter call there was, call it $20 million to $25 million of pressure in our PS business around COVID going away sooner than expected and cost pressure in that business. That was offset by our RDS business performing better than expected, and so called out a plus 5 to 10 relative to what we had expected for the year in that business. What we've seen now coming into the third quarter is I would put it into kind of two buckets the first would be around our HS business and as you think about that July August time frame, that probably cost us a little over $5 million in profitability with those sales going away. Again, we've seen return of the foot traffic in POS in September and into the fourth quarter, but it isn't like that return is catching up those lost kind of sales in July and August. It's really just back to what our expectation was. And so, you got to call it just over five there. And then I think there is another 10 to 15 among all of the businesses, both PS, HS and Canada, primarily a little bit in RDS around all of the craziness that's going on in the fourth quarter from a cost perspective, both supply chain, freight costs and some of the outside storage that we talked about in the prepared remarks. So that's how we would kind of bucket it and we feel like we've captured pretty much all of the cost as we go into the fourth quarter. Obviously disappointed, but it's a lot of uncontrolled costs and a lot of craziness that's going on got it.

Got it. That's helpful and then just back on hardware and what you saw this summer and the pick up. Any way you can sort of give us a sense of the cadence for sales, I mean could you go significantly negative and now we're slightly positive or what's the trend line look like.

Yes. If you think about HS our hardware, Ryan, we were up 13 in the first quarter, 5 in the second quarter, off of a pretty strong obviously, last year. Our retailers, as we said, were continued to say guys don't take your foot off the gas. We were thinking 5 in the third, roughly and that was down 5. That will give you a sense for the difference. And then, we're probably going to inch into double-digit in the fourth for what we're seeing right now. But, but that's basically of the magnitude. As one retailer said we should have been selling plane tickets and parking tickets at the airport in July August, because they just really did slow down and I think it was a bit of lumber for sure, but I think people just said screw it we're getting out of the house and so footsteps did decline, but we thought HS would be up about 5 over a 22.7% increase last year and it was down about 5. Rough math Rocky?

No, that's right. And Ryan, the only thing that I would point to when you think about taking all the COVID noise out up 16% in the quarter versus 19% and when you look year-to-date up almost 19% over 19%. So in line or quite frankly slightly above, how we think about HS be in the kind of mid single-digit top line grow run an annual basis.

Got it. Okay, that's helpful. And then one more if I could just the outlook for price cost in 2022. Right? Based on what you know today. I know things can move around. But is the goal to be neutral or should we think about you lagging a little bit in the first half and then maybe recovering in the second half?

I would say recovering in the second half. I would say the first half. I just don't know. I would, my guess is flat, but honestly, it could get a little worse. With this thing that's going in right now Ryan, November 15 with the $100 a day after day 10, and then going up $100 each day you're talking about, in not such a long period of time stuff getting to demurrage charge of $10,000 or $15,000 per container and if you got seasonal goods and you missed the season you're just going to say, take it. And so I am worried that the intent behind this latest move is going to actually slow things down more. So that's my concern. I'm not concerned about our sales. I'm not concerned about what we control, but that one could get a little dicier before it settles. So I would say flat net in the first half and we should see some improvement in the second half. And honestly, we're definitely going to have inventory adjustments, back to normality when we see the ability to do that, but Rocky and I are not planning on that in the first half just because when you're at 70 you can't catch up right now. When you're at 90 and 95 at the shelf you just got to keep the foot on and we've got the foot on right now for that one.

Our next question comes from the line of Brendan Popson with CJS Securities.

Hi, good morning. I just wanted to add about the-- you addressed this a little [Phonetic] baseline to clarify on pricing, you talked about 20% plus after the third increase and you said essentially, you've done about 7.5 twice now. When I'm looking at the third quarter results how much pricing was there year-over-year. Is that just that first 7.5%, just trying an idea of like pricing versus volume, if that makes sense.

Yes. That first 7.5% went into effect ended June. So, yes, that would be all we'd really see in the third quarter. With the second one all in basically October, November. And so, yes, that's exactly right.

Okay, great. Thank you and then diving into that retailer win that you had, you mentioned $17 million for next year, like a normalized full year or do you think that can go if it performs like you think you can.

Yes, so think about it, the shelf is going to be empty and the great news is that they're going to pay for the old stuff, so we're really super excited, we don't want to pay for slotting for this one. So we're going to fill the shelf in the pipe and then sell for half of the year. So you'll see that thing grow, but not double because of the load-in. What I'm most excited about is we've never had this account. I thought it was a good sale per se 5 frigging years to get this one with our 40-year veteran. So we must not be as good as we think, but honestly, it's going to be really interesting is when their consumers and they have a ton of them, see that they are actually in the fastener business, that what was a, call at $21 million, $22 million piece of business, $23 million piece of business annually. It could be a lot better, that's what I'm most excited about, because with our people in the store and the selection that we're giving them it's not even going to be close. So I feel really good about it, but to answer your question the 17 is probably a 21, 22 annual until we start to rock and roll off the shelf, so because of the load it.

Okay. And you said that customer who is doing like low 20s with their old fastener offering?

Yes. They would say would be about a 21-22 Annual with what they know because it is a very different set than the one they had. So that is their guess based on the velocity right now.

Our next question comes from the line of Brian Butler with Stifel.

Hey, good morning. Thanks for squeezing me in here. I'll try to be quick. Just I guess we talked a lot about on the Supply noise that's out there. Can you give maybe some color on demand? Is that now back at some normalized level, now that you're looking at kind of that two-year stack? Can we talk about where that is and how that, maybe you could remind us how that looked out across your algorithm of the 6% revenue and 10% EBITDA growth for the segments.

Yes, Brian, it is. And so as you think about that, two-year stack that we talked about in HS, you in the quarter up 16, year to date up 19 as we're looking today our algorithm assumes we do 2% market. We've said the macro environment that we're in today we believe that's actually higher than that, it's more around 4. Over the next several years, just given the trends in the age of housing and people aging in place, millennial buying their first homes, etc., and we believe that is intact today as we think about coming through at the end of the year and going into 2022. We'll keep 2%, but we think that there is a little bit of upside as you think about what's happening in the markets now, but the one item that we will tell you as you think about north of 20% price, there is always some pressure on the market when you do that. So you think about a local hardware store, they've got a limited amount of money to buy. Now, that isn't going to mean they buy 20% less, it might mean they buy a couple percent less, and so we feel, as you think through it and you think about only 1% price in our normal algorithm we feel real confident that our top-line can be at or above that mid single digits as we think about 2022 and 2023 with all the price we're taking.

Okay, great. And then on a follow up, when you think about free cash, how should we think about near term and maybe long-term kind of that conversion of EBITDA to cash, especially considering the supply chain issues in the working capital requirements? Obviously, you're not going to have another $100 million use of cash for inventory build, but I'm guessing it's also not going to flow out. So what's the right way to think of cash kind of near-term as well as kind of longer term?

Yes. So, are we still believed $125 million for 2022 is a good free cash flow number, even off the rebased EBITDA level and we won't likely be a cash taxpayer in 2022? So, that's an important component, obviously, you guys have the math around interest will be in the $30 million to $35 million range from an interest perspective versus what we paid historically. We're not today, and it's probably unlikely even in our year-end call, that we're going to anticipate bringing those inventories down in 2022. At some point when lead times go back to normal, even if it's not back to 120 days, but call it back in the mid 100s, that's going to allow us to free up inventory, obviously inflation in any period that we've seen significant commodity inflation periods after that we've seen nice working capital pickup. So, there will be a pent-up nice working capital benefit at some point in the next year or two. We're probably not going to predict it happens in 2022, if it does, that would be a nice windfall probably more likely we would tell you that that's a 23 type item as our inventory unwinds.

Okay, great. And maybe one last quick one, you talked about leverage kind of target of three times and maybe that slipping a little bit. When do you think you can hit that target, like that three times?

Yes. So if we just took our free cash flow and pay down debt over the next couple of years, by the end of 2023 we would be kind of in that mid-2 times range. And so I think that will still be our target. I think inside 2023, we can do some moderate M&A, buy at good multiples with nice synergy and I think you could see us hit that kind of in that end of 2023 time frame we can be, call it 2.7-ish.

Thank you. I'm showing no further questions at this time, I would like to turn the conference back to Jennifer Hills.

Thank you for joining us this morning. A replay of this call will be available on our website. Thank you.

Thanks. Thanks for joining us.

This concludes today's conference call. Thank you for participating. You may now disconnect.